Adrian Mooy & Co - Accountants Derby

Adrian Mooy & Co

Welcome to our home page. We are a firm of Chartered Certified Accountants and tax advisors in Derby. We help businesses like yours grow and be more profitable.  For a friendly service covering audit, tax, accounts, self assessment, VAT & payroll please contact us.

 

How can we help you?

We offer a traditional personal service and welcome new clients.

From start-up to exit and everything in-between - whether you’re  struggling with company formation, bookkeeping, or annual accounts and taxation, you can count on us at every step of  your business’s journey.

We also offer cloud-based accounting solutions. With the power of cloud accounting in your hands, you can access accurate real-time data on the go, accept instant payments and even automate repetitive tasks like invoicing. Fast, easy, touch-of-a-button accounting is the future.

If you are looking for a Derby accountant then please contact us.

○  Quality checked firm - awarded the ACCA Quality Checked mark

○  Tax solutions to help you keep your income

○  Cloud-based accounting solutions

○  Transparent affordable pricing

Accountants Derby
Accountants Derby

TAX BRIEFING

JUNE 2019

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Services

We offer a range of high quality services

Web-based accounting

Xero is a web-based accounting system designed with the needs of small business owners in mind.

 

It can automatically connect to your bank and download your bank statements. From there it’s simple to tell Xero what transactions relate to and once told it remembers and looks out for similar transactions. This saves time and makes keeping your accounts up to date easier.

 

Log in from any web browser. As your accountant we can log in and provide help.

 

Making Tax Digital - VAT

Our process for delivering tax accounting vat self assessment and payroll services

 

Arrow indicating direction of process flow

Our Process

Understand your needs

Firstly we listen and gain an understanding of your business and what you are aiming to achieve.

Continuous improvement

We seek your opinions on the service we provide and respond to feedback in order to upgrade and improve what we do.

Build a relationship

Success in business is based around relationships and trust. Our objective is to develop and build strong relationships with our clients, based on two way trust and respect.

Confirm your expectations

Our aim is  to help you maximise your business potential and we tailor our service to meet your requirements and agree a timetable for delivering them.

Actively communicate

Communication is important to the success of any commercial venture. It is therefore a vital part of our work with you, sharing the knowledge and ideas that help you to realise your ambitions.

Our Process

Understand your needs

Confirm your expectations

Actively communicate

Build a relationship

Continuous improvement

Straightforward and easy to deal with Adrian Mooy & Co provide an efficient, friendly and professional service - payroll, tax returns, annual accounts and VAT returns are always done on time.    Eddie Morris

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Testimonials

First class! Super accountant! We have been with Adrian Mooy & Co since 1994. They provide a prompt, accurate & reliable service. There is always someone at the end of the phone to help and advise us. They have always delivered and we are more than happy to recommend them.    Ian Cannon

Helpsheets

Business expenses

Being savvy with your expenses is a large part of running a successful business, regardless of its size. Claiming expenses is a simple way to keep your business tax efficient – it reduces your profit, which in turn reduces your tax payments. By claiming every allowable expense you’re making sure you don’t pay a penny more in tax than you have to.

 

For more information about exactly what expenses you can claim, see our helpsheets.

  • ER reset & the two year requirement for sole traders

    Entrepreneurs’ Relief (ER) entitles a business owner to significant relief from Capital Gains Tax (CGT) on the disposal of their business, often halving the consequent tax bill.

     

    To qualify for ER, the company must normally have been the business owner’s personal company for the whole of the last two years and they must have been an officer or employee throughout.

     

    Until now, this has created problems for sole traders who have recently incorporated, as incorporation has had the effect of resetting the two year requirement.

     

    However, provisions contained in the Finance Act 2019 mean that the conditions for ER will be considered to have been met where the shares in a newly incorporated business have been issued to the business owner in exchange for all business assets or all assets other than cash and as a going concern.

     

    Failing to transfer business vehicles or premises, for example, into the new company can mean that a business owner must wait an additional two years before disposing of the company in order to qualify for ER.

     

    Sole traders and owners of other unincorporated businesses wishing to take advantage of ER should seek professional advice at the earliest opportunity.

  • Making Tax Digital (MTD) – The Sign Up Process

    The first mandatory submission for quarterly VAT filers will be the 30th June with the VAT return due by the 7th August. Please remember that HMRC do not automatically know that a business will be required to comply with MTD, instead each business must itself determine if and when it needs to comply with MTD and complete a two-stage sign-up process before the relevant MTD style submission can be made.

    Firstly, notification to HMRC has to be made via their website that the business needs to comply with MTD going forwards. Secondly, the business needs to connect the MTD compatible software to HMRC’s systems (which should only be done once the confirmation email is received back from HMRC to the first point above acknowledging the successful sign up).

    As it can take up to 72 hours for HMRC to confirm each sign up, this shouldn’t be left until the point at which the submission is to be made, and we would recommend that all affected businesses aim to have their sign ups completed by mid-July.

  • Electricity for electric cars – a tax-free benefit

    The Government is keen to encourage drivers to make environmentally friendly choices when it comes to choosing a car. As far as the company car tax market is concerned, tax policy is used to drive behaviour, rewarding drivers choosing lower emission cars with a lower tax charge, while penalising those whose choices are less green.

    The use of the tax system to nudge drivers towards embracing electric cars also applies in relation to the taxation of ‘fuel’. As a result, tax-free benefits on are offer to those drivers who choose to ‘go electric’.

    Company car drivers

    Electricity is not a ‘fuel’ for the purposes of the fuel benefit charge. This means that where an employee has an electric company car, the employer can meet the cost of all the electricity used in the car, including that for private journeys, without triggering a fuel benefit charge. This can offer significant savings when compared with the tax bill that would arise if the employer pays for the private fuel for a petrol or diesel car. However, it should be noted that a fuel charge may apply in relation to hybrid models.

    Example

    Maisy has an electric company car with a list price of £20,000. Her employer meets the cost of all electricity used in the car, including that for private motoring. As electricity is not a fuel for these purposes, there is no fuel benefit charge, and Maisy is enabled to enjoy her private motoring tax-free.

    By way of comparison, the taxable benefit that would arise if the employer meets the cost of private motoring in a petrol or diesel company car with an appropriate percentage of 22% would be £5,302 (£24,100 @ 22%) for 2019/20. The associated tax bill would be £1,060.40 for a basic rate taxpayer and £2,120.80 for a higher rate taxpayer.

    However, the rules do not mean that an employee loses out if they have an electric company car and initially meets the cost of electricity for business journeys and reclaim it from their employer. There is now an advisory fuel rate for electricity which allows employers to reimburse employees meeting the cost of electricity for business journeys at a rate of 4p per mile without triggering a tax bill. However, amounts in excess of 4p per mile will be chargeable.

    Employees using their own cars

    Currently, there is no separate rate for electric cars under the approved mileage payments scheme. This means that the usual rates apply where an employee uses his or her own electric car for business. Consequently, the employer can pay up to 45p per mile for the first 10,000 business miles in the year and 25p per mile for subsequent business miles tax-free. If the employer pays less than this, the employee can claim a deduction for the shortfall. Payments in excess of the approved amounts are taxable.

    Employees with their own electric cars can also enjoy the benefit of tax-free electricity for private motoring – but only if they charge their car using a charging point provided by their employer at or near their place of work. The exemption also applies to cars in which the employee is a passenger, so would apply, for example, if an employee’s spouse drove the employee to work, charging their car when dropping the employee off or picking the employee up.

  • Making Tax Digital for VAT – what records must be kept digitally

    Making Tax Digital (MTD) for VAT starts from 1 April 2019. VAT-registered businesses whose turnover is above the VAT registration threshold of £85,000 will be required to comply with MTD for VAT from the start of their first VAT accounting period to begin on or after 1 April 2019.

    Digital record-keeping obligations

    Under MTD for VAT, businesses will be required to keep digital records and to file their VAT returns using functional compatible software. The following records must be kept digitally.

    Designatory data - Business name - Address of the principal place of business - VAT registration number - A record of any VAT schemes used (such as the flat rate scheme)

    Supplies made - for each supply made: - Date of supply - Value of the supply - Rate of VAT charged

    Outputs value for the VAT period split between standard rate, reduced rate, zero rate and outside the scope supplies must also be recorded.

    Multiple supplies made at the same time do not need to be recorded separately – record the total value of supplies on each invoice that has the same time of supply and rate of VAT charged.

    Supplies received - for each supply received: - The date of supply - The value of the supply, including any VAT that cannot be reclaimed - The amount of input VAT to be reclaimed.

    If there is more than one supply on the invoice, it is sufficient just to record the invoice totals.

    Digital VAT account

    The VAT account links the business records and the VAT return. The VAT account must be maintained digitally, and the following information should be recorded digitally:

    1. The output tax owed on sales.
    2. The output tax owed on acquisitions from other EU member states.
    3. The tax that must be paid on behalf of suppliers under the reverse charge procedures.
    4. Any VAT that must be paid following a correction or an adjustment for an error.
    5. Any other adjustments required under the VAT rules.

    In addition, to show the link between the input tax recorded in the business' records and that reclaimed on the VAT return, the following must be recorded digitally:

    1. The input tax which can be reclaimed from business purchases.
    2. The input tax allowable on acquisitions from other EU member states.
    3. Any VAT that can be reclaimed following a correction or an adjustment for an error.
    4. Any other necessary adjustments.

    The information held in the Digital VAT account is used to complete the VAT return using `functional compatible software’.  This is software, or a set of compatible software programmes, capable of:

    • Recording electronically the data required to be kept digitally under MTD for VAT.
    • Preserving those records electronically.
    • Providing HMRC with the required information and VAT return electronically from the data in the electronic records using an API platform.
    • Receiving information from HMRC.

    Functional compatible software is used to maintain the mandatory digital records, calculate the return and submit it to HMRC via an API.

    Getting ready - The clock is ticking and MTD for VAT is now less than a year away.

  • Entrepreneurs’ relief – what do the Budget changes mean?

    Ahead of the 2018 Budget there was some speculation that entrepreneurs’ relief may be scrapped. In the event, this did not happen. However, the relief made an appearance with the announcement of changes to the personal company test, applying from Budget day, and of a doubling of the qualifying period throughout which the conditions must be met for two years from 6 April 2019.

    Nature of the relief - Entrepreneurs’ relief reduces the rate of capital gains tax on disposals of qualifying assets to 10%. This is subject to a lifetime limit of £10 million. Spouses and civil partners have their own limit.

    The relief is available where there is:

    • a material disposal of business assets;

    • a disposal associated with a material disposal; or

    • a disposal of trust business assets.

    Availability of entrepreneurs’ relief is contingent on the qualifying conditions being met. The qualifying conditions depend on the type of disposal.

    The relief is complex, and a detailed discussion of the relief is beyond the scope of this article. However, guidance is available in HMRC’s Capital Gains Tax Manual at CG63950ff.

    Shares in a personal company - Entrepreneurs’ relief is available for disposals of shares or securities in a personal company. To qualify, throughout the ‘qualifying period’ the company must be a personal company and either a trading company or the holding company of a trading group. The taxpayer must either be an officer or an employee of that company or of one or more members of the trading group.

    The definition of a ‘personal company’ changed from 29 October 2018 (Budget day). Prior to that date, a personal company was one in which the individual held at least 5% of the ordinary share capital and that holding gave the holder at least 5% of the voting rights in the company.

    From 29 October 2018 two further conditions must be met. The holding must also provide entitlement to at least 5% of the company’s distributable profits and 5% of the assets available for distribution to equity holders in a winding up.

    Qualifying period - Entrepreneurs’ relief is only available if the conditions are met throughout the ‘qualifying period’. This is currently set at one year. However, it was announced in the Budget that the qualifying period will be doubled to two years from 6 April 2019 (except in relation to disposals where the business ceased prior to 29 October 2018).

    Securing the relief - The timing of the disposal is important in securing the relief. If the disposal is one of shares in a personal company, and the new definition is not met, the qualifying period clock cannot start to run until the date when all conditions are met. To secure relief, the shares should not be disposed of until at least two years from the date on all of the conditions are first met.

    Where the conditions have already been met for one year but will not have been met for two years by 6 April 2019, it may be preferable to dispose of the shares prior to 6 April 2019 to secure the relief. Alternatively, if the disposal is to take place after that date, it will make sense to wait until conditions have been met for two years in order to benefit from the relief.

  • Rental deposits

    A landlord will usually take a deposit from a tenant when letting a property to cover the cost of any damage caused to the property by the tenant. Where a property is let on an assured shorthold tenancy, the tenants’ deposit must be placed in an official tenancy deposit scheme.

    The purpose of the deposit is to cover items such as damage to the property that extends beyond normal wear and tear. The items covered by the security deposit should be stated in the letting agreement.

    The deposit charged cannot now exceed five weeks rent.

    Is it taxable?

    The extent to which the deposit is included as income of the rental business depends on whether all or part of the deposit is retained by the landlord. In a straightforward case where a security deposit is taken by the landlord, held for the period of the tenancy and returned to the tenant at the end of the rental period, the deposit is not included as income of the property rental business.

    However, if at the end of the tenancy agreement the landlord retains all or part of the deposit to cover damage to the property, cleaning costs or other similar expenses, the amount retained is included as income of the property rental business. The retained deposit is a receipt of the business in the same way as rent received from the tenant. However, the actual costs incurred by the landlord in making good the damage or having the property professionally cleaned are deducted in computing the profits of the business.

    The retained deposit is reflected as rental income of the property rental business for the period in which decision to retain the deposit is taken, rather than for the period in which the deposit was initially collected from the tenant.

    Example

    Kevin purchases a property as a buy to let investment. He collects a security deposit of £1,000 from the tenant. The terms of the deposit are set out in the tenancy agreement.

    The let comes to an end in July 2019. When checking out the tenant, it transpires that the tenant has failed to have the carpets cleaned, as per the terms of the agreement, and also that he has damaged a door, which needs to be repaired.

    After discussion, Kevin and the tenant agree that £250 of the deposit will be retained to cover cleaning and repair costs. The balance of the despot (£750) is returned to the tenant in October 2011.

    Kevin spends £180 having the property professional cleaned and £75 having the door repaired.

    When completing his tax return, he must include as income the £250 retained from the tenant. However, he can deduct the actual cost of cleaning the property (£180) and repairing the door (£75). As the amount actually spent (£255) exceeds the amount retained, he is given relief for the additional £5 in computing the profits of his property rental business.

    The balance of the deposit returned to the tenant is not taken into account as income of the business.

  • Managing a rental business from home

    A landlord will often manage their property rental business from home, and in doing so will incur additional household expenses, such as additional electricity and gas, additional cleaning costs, etc. As with other expenses, the landlord can claim a deduction for these when working out the profits of the rental business.

    Most unincorporated landlords will now prepare accounts on the cash basis.

    Wholly and exclusively incurred

    The basic rule for an expense to be deductible in computing the profits of a rental business is that the expenses relate wholly and exclusively to that business. This applies equally to a deduction for household expenses – they can be claimed where they relate wholly and exclusively to the rental business.

    Actual costs

    Where the expenses are wholly and necessarily incurred, a deduction can simply be claimed for the actual expenses. In reality, this will take some working out as household bills will not be split between personal and business expenses. Any reasonable basis of apportionment can be used – such as floor area, number of rooms, hours spent etc. Records should be kept, together with the basis of calculation.

    Simplified expenses

    Where a landlord spends more than 25 hours a month managing the business from home, the simplified expenses system can be used to work out the deduction for the additional costs of working from home. The expenses depend on the number of hours worked in the home each month, and the deduction is a flat monthly amount, as shown in the table below.

    Hours of business use per month Flat rate per month

    25 to 50 hours £10

    51 to 100 hours £18

    101 hours or more £26

     

    The hours are the total hours worked at the home by anyone in the property rental business.

    Example

    Nadeem runs his property rental business from home. In 2018/19, he spends 60 hours a month working on the business in all months except August and December, in respect of which he spends 30 hours in each on those months working on the business.

    For 2018/19 he is able to claim a deduction of £200 for expenses of running his business from home (10 months @ £18 plus 2 months @ £10).

    The simplified expenses rule does not cover telephone and internet, which can be claimed in addition to the deduction for simplified expenses.

  • When should a business register for VAT?

    All traders – whether sole traders, partnerships, or limited companies – are obliged to register to charge and pay VAT once annual sales reach a pre-set annual threshold. This threshold remains at £85,000 for the year commencing 1 April 2019.

    The annual VAT threshold is determined by total sales and is not the same as total profits (which is generally sales minus expenses). A business can make a loss and still need to register for VAT!

    In summary, a business must register if:

    • its taxable outputs, including zero-rates sales (but not exempt, non-business, or ‘outside the scope’ supplies),have exceeded the registration threshold in the previous 12 calendar months – unless the business can satisfy HMRC that its taxable supplies in the next 12 months will not exceed a figure £2,000 below the registration threshold (so currently £83,000); or

    • there are reasonable grounds for believing that the business’s taxable outputs in the next 30 days will exceed the registration threshold; or

    • the business takes over another business as a going concern, to which the two bullet points above apply.

    The threshold operates on a month-by-month basis, so a check should be made at the end of each month to make sure the business hasn’t gone over the limit in the previous twelve months.

    The month-by-month basis also works by looking forward, so it is equally important at the end of each month to consider whether the limit will be exceeded in the following twelve months. If it is anticipated that total sales may exceed the VAT threshold, the business needs to register.

    Where registration is required, HMRC must be notified:

    • within 30 days of the end of the relevant month (past sales condition); or

    • by the end of the 30-day period (expected sales condition).

    If the business does not register with HMRC within the specified time limit, a penalty will be charged, which can eventually be up to 15% of the VAT owed – in addition to the actual VAT due.

    Voluntarily registration - A business can register for VAT even if its turnover (total sales) is below the threshold and it may actually save tax by doing so, particularly if its main clients or customers are organisations that can reclaim VAT themselves.

    Example - A non-VAT registered sole-trader buys a new office photocopier for the business. The copier costs £100 plus VAT, so a total of £120 is paid (£100 plus VAT at 20%). £120 is set against business profits for income tax purposes. If the trader is a basic rate (20%) taxpayer, there will be a tax saving of £24 (20% of £120), so the copier actually costs the trader £96. However, if the business is VAT-registered, the £20 VAT paid on the item (the input tax) can be reclaimed and £100 is set against business profits for income tax. The tax reduction is therefore £20 (20% of £100) and the copier costs the business just £80 – £16 is saved by being registered for VAT.

    The business must not charge or show VAT on its invoices until the VAT number is received from HMRC. However, the VAT for this period must still be paid to HMRC. Therefore the business will need to increase its prices to allow for this and tell its customers why. Once the VAT number is received, the business can reissue the invoices showing the VAT separately.

    Once registration has taken effect, there are a series of administrative obligations which must be complied with, and, importantly, a severe penalty regime exists for getting it wrong.

  • Property partnerships

    A person may own a property jointly that is let out as part of a partnership business. This may arise if the person is a partner of a trading or professional partnership which also lets out some of its land and buildings. A less common situation is where the person is in a partnership that runs an investment business which does not amount to a trade, but which includes or consists of the letting of property.

    When is there a property partnership?

    The letting of a jointly-owned property in itself does not give rise to a partnership – and indeed a partnership is unlikely to exist where joint owners simply let a property that they own together. Whether there is a partnership depends on the degree of business activity involved and there needs to be a degree of organisation similar to that in a commercial business. Thus, for there to be a partnership where property is jointly owned, the owners will need to provide significant additional services in return for money.

    Separate rental business

    A partnership rental business is treated as a separate business from any other rental business carried on by the partner. Thus, if a person owns property in their sole name and is also a partner in a partnership which lets out property, the partnership rental income is not taken into account in computing the profits of the individual’s rental business – it is dealt with separately.

    Further, if a person is a partner in more than one partnership which lets out property, each is dealt with as a separate rental business – the profits of one cannot be set against the losses of another.

    Example

    Kate has a flat that she lets out. She is also a partner in a graphic design agency, which is run from a converted barn. The partnership lets out a separate barn to another business.

    Kate has two property rental businesses. One business comprises the flat that she owns in her sole name and lets out, and the partnership rental business consisting of the barn which is let out as a separate rental business. This is a long-term arrangement.

    Kate must keep her share of the profits or losses from the partnership property business separate from those relating to her personal rental business. She cannot set the profits from one against losses from the other. They must be returned separately on her tax return.

    Partner note: HMRC’s Property Income Manual at PIM1030.

  • Salary v dividend for 2019/20

    A popular profits extraction strategy for personal and family companies is to extract a small salary, taking further profits as dividends. Where this strategy is pursued for 2019/20, what level should be the salary be set at to ensure the strategy remain tax efficient?

    Salary

    As well as being tax effective, taking a small salary is also advantageous in that it allows the individual to secure a qualifying year for State Pension and contributory benefits purposes.

    Assuming the personal allowance has not been used elsewhere and is available to set against the salary, the optimal salary level for 2019/20 depends on whether the employment allowance is available and whether the employee is under the age of 21. The employment allowance is set at £3,000 for 2019/20 but is not available to companies where the sole employee is also a director (meaning that personal companies do not generally benefit).

    In the absence of the employment allowance and where the individual is aged 21 or over, the optimal salary for 2019/20 is equal to the primary threshold, i.e. £8,632 a year (equivalent to £719 per month). At this level, no employee’s or employer’s National Insurance or tax is due. The salary is also deductible for corporation tax purposes. A bonus is that a salary at this level means that the year is a qualifying year for state pension and contributory benefits purposes – for zero contribution cost. Beyond this level, it is better to take dividends than pay a higher salary as the combined National Insurance hit (25.8%) is higher than the corporation tax deduction for salary payments.

    Where the employment allowance is available, or the employee is under 21, it is tax-efficient to pay a higher salary equal to the personal allowance of £12,500. As long as the personal allowance is available, the salary will be tax free. It will also be free of employer’s National Insurance, either because the liability is offset by the employment allowance or, if the individual is under 21, because earnings are below the upper secondary threshold for under 21s (set at £50,000 for 2019/20). The salary paid in excess of the primary threshold (£3,868) will attract primary contributions of £464.16, but this is outweighed by the corporation tax saving on the additional salary of £734.92 – a net saving of £279.76. Once a salary equal to the personal allowance is reached, the benefit of the corporation tax deduction is lost as any further salary is taxable. It is tax efficient to extract further profits as dividends.

    Dividends

    Dividends can only be paid if the company has sufficient retained profits available. Unlike salary payments, dividends are not tax-deductible and are paid out of profits on which corporation tax (at 19%) has already been paid.

    However, dividends benefit from their own allowance – set at £2,000 for 2019/20 and payable to all individuals regardless of the rate at which they pay tax – and once the allowance has been used, dividends are taxed at lower rates than salary payments (7.5%, 32.5% and 38.1% rather than 20%, 40% and 45%).

    Once the optimal salary has been paid, dividends should be paid to use up the dividend allowance. If further profits are to be extracted, there will be tax to pay, but the combined tax and National Insurance hit for dividends is less than for salary payments, making them the preferred option.

  •  

  • Getting ready for MTD for VAT

    The start date for Making Tax Digital (MTD) for VAT is fast approaching – from the start of your first VAT accounting period beginning on or after 1 April 2019, if you are a VAT registered business with VATable turnover over the VAT registration threshold of £85,000, you will need to comply with MTD for VAT. This will mean maintaining digital records and filing the VAT return using MTD-compatible software. Businesses within MTD for VAT will no longer be able to use HMRC’s VAT Online service to file their VAT return. However, you can still use an agent to file your return on your behalf.

    Businesses whose VATable turnover is below the registration threshold do not have to join MTD, but can choose to do so if they wish. However, once they are within MTD for VAT, they must remain in it as long as they are VAT registered – there is no going back.

    If you have yet to start preparing for MTD for VAT, it is now time to do so.

    What does MTD for VAT mean for you?

    Under MTD for VAT you will need to keep your business records digitally if you do not already do so. If you are already using software to keep your business records, you will need to check that your software supplier plans to introduce MTD-compatible software, and upgrade as necessary.

    If you do not currently keep your VAT records digitally or your current software supplier does not plan to introduce MTD-compatible software, you will need to choose software that will enable you to fulfil your MTD for VAT obligations.

    MTD-compatible software

    MTD-compatible software (also referred to as ‘functional compatible software’) is a software product or set of software products which meet the obligations imposed by MTD for VAT and enable records to be kept digitally and data to be exchanged digitally with HMRC via the MTD service. Where more than one product is being used, the data flows between the applications must be digital – data cannot be entered manually. However, businesses will be allowed to cut and paste data from one application to another until 31 March 2020, after which all links must be digital.

    Spreadsheets

    If you currently use spreadsheets to summarise VAT transactions, calculate VAT or to arrive at the information needed to complete the VAT, once MTD starts, you will be able to continue to do so. However, you will no longer be able to key the relevant figures into the appropriate boxes on the VAT return. Instead you will need to use MTD-compatible software to enable you to send your VAT returns to HMRC and to receive information back from VAT. Bridging software may be used to make spreadsheets MTD-compatible.

    However, to comply with MTD for VAT, the data must be transferred digitally – it cannot be rekeyed into another software package. But there will be a transition period and businesses can cut and paste until 31 March 2020, after which all links between products must be digital.

    Bridging software

    HMRC use the term ‘bridging software’ to mean a digital tool which is able to take information from another application, such as spreadsheets or an in-house system, and allow the user to send the data to HMRC in the correct format.

    Acceptable software

    HMRC produce a list of software companies that are working with them to produce MTD-compatible software. Details can be found on the Gov.uk website

    Partner note: VAT Notice 700/22: Making Tax Digital for VAT.

  • Getting ready for off-payroll working changes

    From 6 April 2020 the off-payroll working rules that have applied since 6 April 2017 where the end client is a public sector body are to be extended to large and medium private sector organisations who engage workers providing their services through an intermediary, such as a personal service company.

    There are tax and National Insurance advantages to working ‘off-payroll’ for both the engager and the worker. The typical off-payroll scenario is the worker providing his or her services through an intermediary, such as a personal service company. Providing services via an intermediary is only a problem where the worker would be an employee of the end client if the services were provided directly to that end client. In this situation, the IR35 off-payroll anti-avoidance rules apply and the intermediary (typically a personal service company) should work out the deemed payment arising under the IR35 rules and pay the associated tax and National Insurance over to HMRC.

    New rules

    Compliance with IR35 has always been a problem and it is difficult for HMRC to police. In an attempt to address this, responsibility for deciding whether the rules apply was moved up to the end client where this is a public sector body with effect from 6 April 2017. Where the relationship is such that the worker would be an employee if the services were supplied direct to the public sector body, the fee payer (either the public sector end client or a third party, such as an agency) must deduct tax and National Insurance from payments made to the intermediary.

    These rules are to be extended from 6 April 2020 to apply where the end client is a large or medium-sized private sector organisation. This will apply if at least two of the following apply:

    • turnover of more than 10.2 million;
    • balance sheet total of more than £5.1 million;
    • more than 50 employees.

    Where the end client is ‘small’, the IR35 rules apply as now, with the intermediary remaining responsible for determining whether they apply and working out the deemed payment if they do.

    Getting ready for the changes

    To prepare for the changes, HMRC recommend that medium and large private sector companies should:

    • look at their current workforce to identify those individuals who are supplying their services through personal service companies;
    • determine whether the off-payroll rules will apply for any contracts that extend beyond 6 April 2020;
    • start talking to contractors about whether the off-payroll rules apply to their role; and
    • put processes in place to determine if the off-payroll working rules will apply to future engagements.

    Workers affected by the changes should also consider whether it is worth remaining ‘off-payroll’; providing their services as an employee may be less hassle all round.

  • Employees – claim a tax deduction for expenses

    Employees often incur expenses in doing their job – this may be the cost of a train ticket or petrol to visit a supplier, or purchasing stationery or small tools which are used in their job. Employers will frequently reimburse the employee for any expenses that they incur, but where such a reimbursement is not forthcoming, the employee may be able to claim a tax relief.

    The test

    Employment expenses are deductible only if they are incurred ‘wholly, exclusively and necessarily in the performance of the duties of the employment’. The test is a harsh test to meet; the ‘necessary’ condition means that ‘each and every’ jobholder would be required to incur the expense. Consequently, there is no relief if the expense is not ‘necessary’ and the employee chooses to incur it (even if the ‘wholly and exclusively’ parts of the test are met). The rules for travel expenses are different, but broadly operate to allow relief for ‘business travel’.

    In the performance of the job v putting the employee in a position to do the job

    A distinction is drawn between expenses that are incurred in actually performing the job and those which are incurred in putting the employee in the position to do the job. Expenses incurred in travelling from the office to a meeting with a supplier and back to the office are incurred in performing the job. By contrast, childcare costs or home to work travel are incurred to put the employee in a position to do the job. Relief is available only for expenses incurred as part of the job, and not for those which incurred, albeit arguably necessarily, to enable the employee to do the job.

    Expenses for which relief may be claimed

    A deduction can be claimed for any expense that meets the ‘wholly, exclusively and necessarily’ test. Examples include professional fees and subscriptions, travel and subsistence costs, additional costs of working from home, cost of repairing tools or specialist clothing, phone calls, etc.

    Where the expense is reimbursed by the employer, a deduction cannot be claimed as well; however, the amount reimbursed is not taxable and is ignored for tax purposes.

    Using your own car

    Where an employee uses his or her own car for business travel, the employer can pay tax-free mileage payments up to the approved rates. For cars and vans, this is 45p per mile for the first 10,000 miles in the tax year and 25p per mile for any subsequent miles.

    If the employer does not pay mileage allowances or pay less than the approved amount, the employee can claim tax relief for the difference between the approved amount and the amount paid by the employer.

    Flat rate expenses

    Employers in certain industries are able to claim a flat rate deduction for certain expenses in line with rates published by HMRC (see www.gov.uk/guidance/job-expenses-for-uniforms-work-clothing-and-tools#claim-table). Although claiming the flat rate removes the need to keep records of actual costs, employees can claim a deduction based on actual costs where this is more beneficial.

    How to claim

    There are different ways to make a claim depending on your circumstances. Claims can be made online using HMRC’s online service, by post on form P87, by phone or, where a self-assessment return is completed, via the self-assessment return.

  • Just starting out

    As long as HMRC can be satisfied that a business is being run on a commercial basis with a view to making a profit, they will usually allow taxpayers to claim tax relief for a trading loss in one tax year against other taxable income (for example PAYE income or a pension) from the same year, or the preceding year. This can be quite beneficial as the claimant can choose which year to claim the losses against. However, HMRC will usually restrict loss relief claimed by individuals who carry on a trade but spend an average of less than ten hours a week on commercial activities.

    Early days - The provisions for tax relief on business losses can be particularly useful in the early years of trading. Broadly, this is because a loss incurred in any of the first four tax years of a new business may be carried back against total income of the three previous tax years, starting with the earliest year. Therefore, if tax has been paid in any of the previous three years, the taxpayer should be entitled to a repayment of tax, which may be especially welcome in those often difficult first few years of running a business.

    The rules for this carry back stipulate that the maximum amount of the loss must be offset each year – it is not permissible to offset just a proportion of the loss in order to spread the loss across three years to take advantage of beneficial tax rates. Again, relief will not be available unless the taxpayer was trading on a commercial basis with a view to making a profit within a reasonable timescale. In practice, this requirement may be difficult to prove in the case of a new business and the taxpayer may need a viable business plan to support a claim.

    Cap on relief - A cap now restricts certain previously unlimited income tax reliefs that may be deducted from income. Trade loss relief against general income, and early trade losses relief, as outlined above, are two areas where this restriction might apply. The cap is set at £50,000 or 25% of income, whichever is greater. ‘Income’ for the purposes of the cap is calculated as ‘total income liable to income tax’. This figure is then adjusted to include charitable donations made via payroll giving and to exclude pension contributions – the adjustment is designed to create a level playing field between those whose deductions are made before they pay income tax, and those whose deductions are made after tax. The result, known as ‘adjusted total income’, will be the measure of income for the purpose of the cap.

    The cap applies to the year of the claim and any earlier or later years in which the relief claimed is allocated against total income. The limit does not apply to relief that is offset against profits from the same trade or property business.

    No need to lose out - Where a loss is made in a tax year, but the trader does not have any other income against which it can be set, the loss can be carried forward indefinitely and used to reduce the first available profits of the same business in subsequent years.

    Finally, losses arising from a business may be set off against any chargeable capital gains. Relief may be claimed for the tax year of the loss and/or the previous tax year. However, the trading loss first has to be used against any other income the taxpayer may have for the year of the claim (for example, against earnings from employment) in priority to any capital gains.

  • Fuel and mileage payments for company car drivers

    The car benefit tax charge does not cover fuel provided for a company vehicle. Where the company pays for all fuel, the fuel benefit will be charged, which is based on the cash equivalent of the benefit each tax year (£24,100 for 2019/20 multiplied by a percentage depending on the car’s CO2 emissions).

    If the company pays for all fuel, but the employee reimburses the company for private use, as long as the amount paid back is equal to, or more than, the amount for personal fuel in the same tax year, the employer will not have to pay anything to HMRC or report on such transactions.

    Where the employer does not directly meet the cost of fuel used for business in a company car, but pays the employee a business mileage allowance, no fuel benefit charge will arise if the mileage allowance does no more than meet the cost of fuel used for business travel. If the mileage allowance is excessive, but it’s only paid for genuine business travel, the ‘profit element’ will be chargeable to tax in the normal way. However, a car fuel benefit charge will arise where, for instance, the payments to the employee cover travel between home and work.

    An employee using their own car for work can claim a mileage allowance from their employer, which is designed to cover the costs of fuel and wear and tear for business trips. The mileage allowance will be tax-free if it does not exceed HMRC’s Approved Mileage Allowance Payment rates.

    The AMAP scheme does not apply for company cars. However, employees can still claim fuel expenses for all business mileage where they pay for the fuel. The rates are lower than the AMAP rates and are updated quarterly.

    HMRC’s guidance on fuel-only mileage rates for company cars confirms that employers are not obliged to use advisory fuel rates. Where an employer wishes to use them, they only apply where the employer:

    • reimburses employees for business travel in their company cars; or

    • requires employees to repay the cost of fuel used for private travel in those company cars.

    If the employer pays more than the relevant advisory fuels rates and the payments are not an actual reimbursement, the excess is taxed and subject to employees’ and employers’ National Insurance Contributions.

    Advisory fuel rates do not apply to electric cars, so any mileage payments should be based on actual costs incurred.

    Where an individual is provided with workplace facilities for charging a battery of a vehicle used by them (including as a passenger), no taxable benefit arises for costs relating to the provision of electricity at those facilities if the following conditions are met:

    • the charging facilities must be provided at or near an employee’s workplace

    • charging must be available to either all the employer’s employees generally, or all the employer’s employees generally at the employee’s workplace

    • charging facilities must be for a battery of a vehicle in which the employee is either the driver or a passenger.

    The benefit will remain taxable if it’s offered in conjunction with an optional remuneration arrangement.

  • MTD software – what do you need?

    Making Tax Digital (MTD) for VAT went live on 1 April 2019. VAT registered businesses with VATable turnover above the VAT registration threshold of £85,000 are required to comply with the requirements of MTD for VAT from the start of their first VAT accounting period beginning on or after 1 April 2019. For certain businesses the start date is delayed until 1 October 2019. Where the business is VAT registered but VATable turnover is below £85,000, MTD for VAT is optional.

    MTD for VAT imposes two digital requirements – digital record-keeping and digital VAT returns.

    Digital record-keeping - Under MTD for VAT, records must be kept digitally within MTD-compatible software. Some software will record all VAT records and accounts. The type of package used may affect whether it is necessary to retain the original document.

    Where a business receives an invoice and enters the information into the MTD-compatible software, the original invoice must be retained. However, if the invoice is scanned into the software, there is no need to retain it, unless it is required for another purpose. It should be noted that VAT law requires the originals of some documents to be retained.

    Records that must be kept digitally include:

    • business name, address, VAT registration number and VAT schemes used;

    • supplies made – time of supply (tax point), value of supply and rate of VAT;

    • supplies received – time of supply, value of supply, amount of input tax claimed;

    • reverse charge transactions.

    To support the VAT returns, summary data must also be maintained in the MTD software:

    • total output tax owed

    • total tax owed on acquisitions from other EU member states

    • total tax that is required to be paid on behalf of a supplies under a reverse charge

    • total input tax entitled to claim on business purchases

    • input tax on allowable acquisitions from other EU member states

    • total tax that need to be paid or reclaimed following the correction of an error

    • any other adjustment allowed or required by the VAT rules

    Where the flat rate scheme is used, there is no need to keep a digital record of purchases unless they are capital expenditure goods on which input tax is claimed. Nor is it necessary to keep a digital record of the goods used in the limited cost business calculation.

    VAT returns - The second part of MTD for VAT is the requirement to file VAT returns digitally using compatible software. HMRC’s VAT Online service can't be used for MTD for VAT.

    Compatible software - MTD-compatible software (functional compatible software) is a software program or set of software programs or applications that are capable of:

    • recording and preserving digital records;

    • providing information and returns to HMRC using the API platform; and

    • receive information via the API platform.

    Some software packages will perform all of the above, some will perform some but not all, so more than one product may be needed. Spreadsheets can be used to record data, but another piece of software will be needed to file the return.

    The links between the different software packages used should be digital. However, while transferring data manually between programs is not acceptable under MTD for VAT – such as keying numbers from a spreadsheet into a package to send a return or ‘cutting and pasting’   HMRC are operating a ‘soft landing’ and will permit this for the first year.

    Software suppliers - HMRC produce a list of software suppliers who produce software compatible with MTD for VAT. The list can be found on the Gov.uk website at www.gov.uk/guidance/find-software-thats-compatible-with-making-tax-digital-for-vat.

  • Student loan deductions

    Employers fulfil many collection roles for HMRC, one of which is the collection of student loan repayments.

    There are now three types of student loans for which employers may be responsible for deducting loan repayments from an employee’s pay. These are:

    • Plan 1 Student Loans;

    • Plan 2 Student Loans; and

    • Post-graduate Loans (PGLs).

    Repayment thresholds

    Employees must make repayments in respect of a student loan when their income exceeds the threshold for their particular loan type. Each loan has its own repayment threshold:

                                        Annual      Monthly     Weekly

    Plan 1 Student Loan  £18,935   £1,577.91   £364.13

    Plan 2 Student Loan  £25,725   £2,143.75   £494.71

    Post-graduate Loan   £21,000   £1,750.00   £403.84

    Repayments are made at the rate of 9% on income in excess of the threshold for Plan 1 and Plan 2 Student loans, and at a rate of 6% on income in excess of the threshold for PGLs.

    Where an employee has both a student loan and a PGL, deductions will be made at the combined rate of 15% where income exceeds the higher loan threshold.

    Starting deductions

    An employer will need to start making deductions in respect of a student or PGL if any of the following apply:

    • a new employee is taken on and has a ‘Y’ in the student loan box on their P45;

    • a new employee tells the employer they are repaying a student loan;

    • a new employee completes a starter checklist confirming that they have a student loan;

    • the employer receives a SL1 start notice from HMRC;

    • the employer receives a PGL1 start notice from HMRC; or

    • the employer receives a Generic Notification Service Student Loan reminder.

    The employer should check they are aware of the type of loan that the employee has, confirming the loan type with the employee where necessary.

    Stopping deductions - The employer should only stop making student loan deductions if they receive a SL2 stop notice or a PGL2 stop notice from HMRC; deductions should not be suspended at the request of the employee.

    Where a stop notice is received, the employer should stop the deductions from the first payday from which it is practical to do so.

    Paying deductions over to HMRC - The employer should pay amounts deducted from employees’ pay in respect of student loan deductions over to HMRC, together with payment of tax and NI, taking care to ensure that the payment reach HMRC by 22nd month where payment is made electronically or by 19th month where payment is made by cheque.

    Leavers - If an employee in respect of whom student loan or PGL repayments are being deducted leaves, the employer should enter a ‘Y’ in box 5 of the P45. This will tell the new employer to make deductions for student loan repayments. A ‘Y’ should be entered in this box even if the employee’s income is below the repayment threshold so no deductions have yet been made. No entry should be made on the P45 if a stop notice has been received.

  • Travel expenses and the 24-month rule

    As a general rule, employees are denied a tax deduction for the cost of travel between home and work. Likewise, subject to a few limited exceptions, if the employer meets the cost of home to work travel, the employee is taxed on it.

    One of the main exceptions to this rule is where an employee attends a ‘temporary workplace’. This is a workplace that the employee goes to in order to perform a task of limited duration or one that he attends for a temporary purposes, even if the attendance is on a regular basis.

    Example 1 - Polly is based in the Milton Keynes office. She is seconded to the Bedford office for 12 months to cover an employee’s maternity leave. At the end of the secondment, she will return to the Bedford office.

    The Bedford office is a temporary workplace.

    Consequently, Polly is allowed a deduction for travel from her home to the Bedford office.

    Example 2 - James is a health and safety officer. He is based in the Liverpool head office. Each week he visits factories in Manchester and Bury to carry out safety checks. The factories are temporary workplaces as each visit is self-contained.

    Consequently, James is allowed a deduction for travel expenses incurred in visiting the factories, even if he travels there from home.

    24-month rule - A workplace does not count as a temporary workplace if the employee attends it in a period of continuous work which lasts, or is expected to last more than 24 months. A ‘period of continuous work’ is one where the duties are performed at the location in question to a ‘significant extent’. HMRC regard duties being performed to a 'significant extent' at a particular location if an employee spends 40% or more of their working time there.

    The upshot of this rule is that where the employee has spent, or is likely to spend, 40% of their working time at the location in question over a period of more than 24 months, that location will be a permanent location rather than a temporary location. Consequently, home to work travel is ‘ordinary commuting’ (travel between home and a permanent workplace), which is not deductible.

    It is important to appreciate that both parts of the test must be met for the workplace to be a permanent workplace – more than 40% of time spent there and over a period of more than 24 months.

    Example 3 - George is employed full-time at a care home in Southampton, a role which he has held for four years. He is sent to full-timework at a new care home in Bournemouth for three years, after which time he will return to the Southampton care home.

    Although the move to the Bournemouth posting is not permanent, the posting lasts more than 24 months and, as such, the Bournemouth home does not qualify as a temporary workplace.

    Consequently, George is not allowed a deduction for the cost of travelling from home to the Bournemouth care home.

    Change of circumstances - Circumstances can and do change. If at the outset a posting is expected to last 24 months, the workplace will be treated as a temporary workplace. If later the posting is extended so that it will last more than 24 months, the workplace ceases to be a temporary workplace from the date that it becomes apparent the posting will exceed 24 months.

    Fixed term appointments rule - An employee undertaking a fixed-term appointment is not entitled to relief for home to work travel, even where it lasts less than 24 months, if the employee attends the workplace for all, or almost all of the period which they are likely to hold the appointment.

    Example - Imogen takes on a 12-month contract at an office in Marlow. Although the appointment is less than 24 months, the Marlow office is not a temporary workplace as Imogen works there for duration of the contract.

    Tax exemption - If the employer pays or reimburses travel expenses which would be deductible if met by the employee, the payment or reimbursement is exempt from tax.

  • Simplified expenses for smaller businesses

    Certain unincorporated small businesses may choose to use the ‘cash basis’ when calculating taxable income, under which participants are taxed on the basis of the cash that passes through their books, rather than being asked to undertake complex and time-consuming calculations designed for big businesses. Whilst easing the administrative burdens of preparing ‘traditional’ accounts, using the cash basis can also help with cash flow as it will not be necessary to accrue for income not yet received, or expenditure not paid out.

    To complement the cash basis, HMRC also introduced ‘simplified expenses’ for small businesses. Basically, instead of working out the exact cost of certain expenses, HMRC allow the business to deduct a standard, or flat rate amount. Simplified expenses can apply to the following expenses:

    • standard mileage rate for business use of cars or motorcycles;
    • flat rate expenses for business use of home; and
    • flat rate adjustment for personal use of business premises.

    The taxpayer should, where relevant, record business miles for vehicles, hours worked at home and the number of people living at the business premises during the course of the tax year. At the end of the tax year, HMRC’s flat rates are used to work out the expenses, which are then included on the self-assessment tax return.

    Vehicles - HMRC’s flat rate mileage allowances are designed to cover all vehicle-related running costs (insurance, repairs, servicing, fuel etc.). Current rates are as follows:

    • first 10,000 miles- 45p per mile
    • exceeding 10,000 miles – 25p per mile
    • Motorcycles – 24p per mile

    Using mileage rates is not obligatory, but once they have been used for a vehicle, they must continue to be used for as long the vehicle is used for the business.

    Where a car is purchased for business use, capital allowances may be claimed, but only if simplified expenses are not being used to work out business expenses for that vehicle.

    Business use of home - A monthly deduction is allowable if certain criteria are satisfied. Rates are:

    Number of hours worked Monthly amount

       25 to 50 £10.00

       51 to 100 £18.00

       101 or more £26.00

    The number of hours worked in a month is the number of hours spent wholly and exclusively on work done by the person in the person’s home wholly and exclusively for the purposes of the trade.

    Mixed use - Where premises are used for both business and private purposes, instead of making the standard deduction outlined above, the business can make a deduction for the non-business use. The allowable deduction will therefore be the amount of the expenses incurred, less the non-business use amount. The non-business use amount is the sum of the applicable amounts (see below) for each month, or part of a month, falling within the period in question (usually the tax year). The applicable amounts are as follows:

    Number of relevant occupants Applicable amount

       1 £350

       2 £500

       3 or more £650

    A relevant occupant is someone who occupies the premises as a home, or someone who stays at the premises otherwise than in the course of the trade.

    Benefits - Simplified expenses may help reduce business and household costs, without needing to retain the associated paperwork. However, like any flat-rate scheme, simplified expenses may result in an increased tax liability. The scheme may not be for everyone and certain checks should therefore be made before using it.

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   Adrian Mooy & Co Ltd  -  61 Friar Gate   Derby   DE1 1DJ  -

adrian@adrianmooy.com

Adrian Mooy & Co - Accountants in Derby
61 Friar Gate Derby, Derbyshire DE1 1DJ
Phone: 01332 202660 Hours: Mon-Fri 9.00am - 5:00pm

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Adrian Mooy & Co is the trading name of Adrian Mooy & Co Ltd.  Registered in England No. 05770414.

Registered to carry out audit work in the UK by The Association of Chartered Certified Accountants.

Details of audit registration can be viewed at www.auditregister.org.uk under number 8011438.

Registered office: 61 Friar Gate, Derby, Derbyshire, DE1 1DJ

 

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